Low deposits could cause more negative equity issues in 2019
Average House Prices
According to the UK house price index in May 2019, the average UK house price is at £229,431. What that figure hides is the real variation in the average house prices across the UK regions, ranging from £134,811 in Northern Ireland to £245,817 in England.
So what does that mean for purchase deposits?
People often ask how much of a deposit they need to purchase their first home or the move to the next home. If you do a quick online search, mortgage providers generally say that you need at least a 5% deposit but it is recommended that higher deposits of 20% are used due to the precariousness of the property market. When you look at the average house prices, that means you would need £11,471 for a 5% deposit or a whopping £45,886 for a 20% deposit. In the different regions that leads to a big variation from £6,740 for a 5% deposit in Northern Ireland all the way to £49,163 for a 20% deposit in England.
So let’s be realistic. Unless you have been saving for years, most people will not be able to afford a 20% deposit. Traditionally people tried to keep their depsosit as low as possible as other costs of purchasing like legal and estate agency fees also needed to be paid and that’s before new furniture, floors etc. As a result many people now have what is known as a high loan to value ratio when they purchase their home. In plain English, a 5% deposit means you have a 95% loan to value ratio – i.e. you still owe 95% of the value of your home.
The other thing about low deposits is that you often have to pay a higher interest rate to get your mortgage, so you are unlikely to be getting the best deals and will be paying more of your monthly income towards your mortgage payment.
So what does the future hold for house prices?
The big question of the moment – what’s going to happen next? Concerns about Brexit are definitely impacting the property market across the country. The number of people purchasing homes has fallen as people are concerned about the potential for house prices to fall or for the cost of everyday items to rise. Some people are also worried about their income if they are unable to continue their business post Brexit or if they lose their jobs.
So, what happens if house prices change?
The worrying thing about having a home with a high loan to value is that even a small reduction in house prices would mean you can’t sell your home and repay your whole mortgage –negative equity. The May 2019 UK House Price Index shows that the average change in house prices in the UK is slowing with only a 0.1% increase in property values in the UK between April and May and a 1.2% increase in the past year. That small increase hides the decreases in house prices in some areas which are hidden by the increases in others – so simply put, the change in house prices depends where you live and in some places house prices are already falling.
Annual price change for UK by country over the past 5 years (Source, UK House Price Index Summary May 2019
What would a decrease in house prices mean if I pay a small deposit?
If you pay a low deposit and house prices fall, you will find yourself with a higher loan to value. For example, if your £200,000 home is now only worth £195,000 and you paid a 5% deposit of £10,000, your loan to value will rise from 95% to 97.5%. A fall to £190,000 would mean your equity and deposit are completely wiped out. A fall to £185,000 means you are in a negative equity position and owe £5,000 more than your home is worth.
This means if you pay a small deposit, you are more likely to end up in a negative equity position if there is a small fall in house prices. People paying smaller deposits often have less disposable income as they are paying higher interest rates for their mortgage, so any changes in prices of goods or interest rates can cause relatively immediate financial problems. With smaller deposits being quite common, the Daily Mail reported in July 2019 that 100,000 borrowers paying low deposits were at risk of negative equity by the end of 2019. They noted 1 in 5 borrowers in the first quarter of 2019 paid a deposit of less than 10% and that this is the highest level since 2007 before the global financial crisis struck. This means that people purchasing their first home now could see themselves stuck by the end of the year if the predicted fall in property values occurs.
What if I find myself in negative equity – are there negative equity options or can I get negative equity help?
Yes. If your home is in a small amount of negative equity, you don’t want to move, you can absorb interest rates rises and you have the affordability to repay the mortgage in full you really don’t have a problem. If however, you do need to move, cannot repay the mortgage in full at the end of the term or are likely to struggle financially in the near future it is time to talk to Negative Equity UK. Negative Equity UK are a company specialising in helping people who find themselves trapped with negative equity. We help hundreds of families every year to solve their negative equity problems and it doesn’t always mean leaving your home, this can often involve negotiating a new deal with the existing lender. There are options if you are struggling to make your monthly payments or you need to sell and are in negative equity and at Negative Equity UK we are there to listen. Just fill in our online form below or give us a call on 0161 660 4403 and see what we can do to help.